Determinants of Sovereign Bond Spreads in Emerging Markets: Local Fundamentals and Global Factors vs. Ever-Changing Misalignments
IMF Working Papers, July 10, 2013
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- Determinants of Sovereign Bond Spreads in Emerging Markets: Local Fundamentals and Global Factors vs. Ever-Changing Misalignments
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Bibliographic details
- Authors: Balazs Csonto, Iryna V. Ivaschenko
- Published: July 10, 2013
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475573206.001
Summary of objectives and approach
- Analyze relationship between global and country-specific factors and emerging market debt spreads from three angles:
- Disentangle effect of global and country-specific developments.
- Investigate whether and how strength of fundamentals is related to sensitivity of spreads to global factors.
- Decompose changes in spreads and analyze behavior of explained and unexplained components over different periods.
- Methodological highlights:
- Break down fitted changes in spreads into contribution of country-specific and global factors.
- Decompose changes in the residual into correction of initial misalignment and increase/decrease in misalignment.
Key findings
- Short-run vs. long-run drivers:
- Both country-specific and global developments are important in the long-run.
- Global factors are main determinants of spreads in the short-run.
- Fundamentals and sensitivity:
- Countries with stronger fundamentals tend to have lower sensitivity to changes in global risk aversion.
- Decomposition and dynamics:
- Changes in spreads follow periods of tightening/widening, which are well-explained by the model.
- Dynamics of components of the unexplained residual follow major developments that impact market sentiment.
- In periods of severe market stress, such as during the intensive phase of the Eurozone debt crisis:
- Global factors tend to drive changes in the spreads.
- The misalignment tends to increase in magnitude and its relative share in actual spreads.
Subjects and keywords (as listed)
- Subject: Asset and liability management, Emerging and frontier financial markets, Financial crises, Financial markets, Financial services, International liquidity, Securities markets, Yield curve
- Keywords: Asia and Pacific, base period, coefficient of VIX, debt performance, EMBIG spread, Emerging and frontier financial markets, emerging market, emerging market bond, emerging market country, emerging market crisis episode, Emerging market debt, error correction coefficient, Europe, Eurozone debt crisis, financial risk, Global, International liquidity, misalignment, rating indicator, Securities markets, short-term coefficient, spreads, WP, Yield curve